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Evening Edition – Inflation falls within Banxico’s target range

February 22, 2019

We expect inflation to reach 3.8% for the end of this year.

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CPI was significantly below market expectations, dragged mainly by non-core food index. Mexico’s CPI posted a bi-weekly rate of -0.10% in the first half of February (from 0.21% a year ago), below our forecast (0.01%) and median market expectations (0.04%).

On an annual basis, CPI increased 3.89% yoy in the 1H of February (from 4.21% in the 2H of January), within the upper bound of the range around central bank’s target (4.0%), with core CPI decelerating slightly, to 3.51% (from 3.55%).

At the margin, headline and core inflation decelerated sharply. We estimate that seasonally-adjusted three-month annualized inflation posted 0.31% in February (from 2.73% in January) for the CPI and 2.88% (from 3.65% in January) for the core index. 

We expect inflation to reach 3.8% for the end of this year. Importantly, core inflation, which Banxico’s board is closely monitoring, is gradually falling. While the recent numbers suggest downside risks for our inflation forecast, we note that remaining uncertainties over the approval in the U.S. congress of the renegotiated NAFTA and over domestic policy direction, at a time that the economy is operating with no slack, continue to be relevant upside risks for inflation.
** Full story here. 

Week ahead: On Monday, the statistics institute (INEGI) will publish 4Q18 GDP growth, which we expect a growth rate of 1.8% yoy. INEGI will also publish December’s monthly GDP proxy (IGAE), which we forecast at 0.8% yoy (after growing 1.8% in November). Also on Monday, the Central Bank will publish 4Q18 current account balance. We expect a deficit of 1.6% of GDP in 2018. On Tuesday, the statistics institute (INEGI) will announce December’s retail sales. We estimate that retail sales grew 3.3% yoy, from 3.4% in November. On Wednesday, INEGI will announce January’s unemployment rate and January’s trade balance. We expect the unemployment rate to post a rate of 3.4%. On the same day, the Central Bank of Mexico (Banxico) will publish the quarterly inflation report (4Q18).


FGV released its monthly consumer survey. The consumer confidence index fell 0.5% mom/sa in February, interrupting a sequence of four consecutive increases. Weaker expectations (-1.5%) offset the increase in the current condition index (1.7%). Despite this movement, expectations remain well above current conditions.

Week ahead: On Monday, January’s current account balance will be released, for which we expect a $7.4 billion deficit. January’s direct investment in the country will also come out, reaching USD 4.5 billion in our forecasts. The confirmation hearing for Roberto Campos Neto nomination as the Central Bank governor, in the Senate, is scheduled for Tuesday (26), at 10:00 AM. January’s PNAD national unemployment rate will come out on Wednesday, for which we forecast a 0.4 p.p. increase to 12.0% (stable at 12.3%, seasonally adjusted). On Thursday, IBGE will release the 4Q18’s GDP. We expect a zero growth qoq/sa, leading to a 1.1% GDP growth in 2018. Also, we forecast a USD 2.8 billion surplus for February’s trade balance, to be released on Friday. January’s CAGED formal job creation will likely be released next week (date not yet specified), for which we expect a net creation of 96k jobs. Finally, FGV’s business confidence surveys for February on construction, industry, commerce and services, as well as the economic uncertainty indicator, will be released throughout the week.


Week ahead: On Wednesday, the INDEC will publish the EMAE (official monthly GDP proxy) for December. Our forecast for 2018 is an economic contraction of 2.2%. Tax collection for February will see the light on Friday. We expect tax collection to increase 40% yoy to ARS 330 billion in February. 


Week ahead: On Thursday, the national institute of statistics (INE) releases January’s industrial activity indicators. We expect manufacturing production to increase 0.3% yoy. On the same day, INE releases the national unemployment rate for the quarter ending in January. We expect the unemployment rate to come in at 6.8%, above the 6.5% recorded one year before, with salaried posts still driving job growth.


The board continues to see the need to accumulate reserves. As expected, the press release from the February 22 non-policy rate meeting expressed the continued auction of put options (USD 400 million cap, under the same rules defined since September) to take place on February 28 and mature on April 1st. So far in February, USD 325 of the USD 400 million cap has be exercised (in January the full cap was reached). The accumulation of reserves follows the possible reduction of the flexible credit line with the IMF in 2020.

In another press release, the central bank conveyed measures undertaken to prevent pressures on short-term liquidity. Since the end of last year, the central bank noted that there has been an increase in the deposits of the National Treasury at the central bank. Increases in these deposits drain liquidity from the economy. To prevent pressures on short-term liquidity, the central bank carried out 90-day REPOS auctions for $ 2 trillion pesos (approx. USD 643 million) and 14 days for $ 3 trillion (approx. USD 966 million). The supply of the rest of the short-term liquidity, approximately $ 14 trillion, will be auctioned in terms of one day. The central bank will use the different instruments available to ensure that the short-term interest rate remains in line with the policy interest rate and that liquidity terms respond to the needs of the market.

The next monetary policy decision will take place on March 29 and we do not see the board in any haste to decrease the monetary stimulus. A still-incipient activity recovery, risky global scenario and better-behaved inflation suggest there is no need for rate hikes in the near term. A modest hiking cycle only in 2H19 remains our base case scenario.

Week ahead: On Wednesday, think-tank Fedesarrollo will publish industrial and retail confidence for January. On Thursday, the institute of statistics will release the urban unemployment rate for January, which we expect to come in at 13.6% (13.4% one year before). On Thursday, GDP for the final quarter of 2018 will be published. We expected a growth of 2.8% in 4Q18. Also on Thursday, the coincident activity indicator (ISE) for the month of December will be released, for which we expect to grow at a stable 2.3% yoy.


Peru’s GDP economy grew 4.0% in 2018. Year over year, GDP grew 4.8% in the 4Q18 (from 2.4% in the 3Q18), taking the 2018 annual growth rate to 4.0%. At the margin, looking at the seasonally-adjusted data reported by the BCRP, the economy expanded 11.9% (annualized) in 4Q18 (from -8.3% qoq/saar in the previous quarter).

Final domestic demand accelerated in 4Q18. Final domestic demand grew 3.8% yoy in the 4Q18 (from 3.0% in the 3Q18). Gross fixed private investment expanded by 2.1% yoy (from 1.6%). Finally, exports grew 2.6% yoy (from -0.6% in the 3Q18), while imports decreased 1.7% yoy (from 1.2% in the 3Q18).

We expect a GDP growth of 4.0% for 2019, assuming that trade tensions dissipate (benefiting metal commodity prices and, consequently, investment) and a still-expansionary monetary policy, which would offset lower fiscal impulse. The main risk to our macro outlook is the possibility of a further escalation in the trade dispute between the U.S. and China (Peru’s top two trading partners). Another downside risk is a sharp deceleration of public investment at the subnational and regional levels, as most of the newly elected officials that took office in 2019 lack experience (affecting budget execution).

On another note, Peru’s current account deficit (CAD) deteriorated in 2018, but remained narrow and fully funded by FDI. The current account deficit deteriorated to 1.5% of GDP in 2018 (from a deficit of 1.2% in 2017), dragged by a slightly wider services deficit (1.1% of GDP, from 0.7% of GDP) and higher net income payments (mainly profits from foreign mining firms), while trade balance remained practically unchanged at 3.1% of GDP. On the financing side, we note that Peru’s CAD is fully-funded by net foreign direct investment (2.9% of GDP in 2018). 

Finally, the nominal fiscal deficit improved in 2018. The nominal fiscal deficit narrowed to 2.5% of GDP in 2018 (from 3.1% of GDP in 2017) due to an improvement of fiscal revenues, reflecting activity recovery. Looking forward, the Ministry of Finance targets a nominal fiscal deficit of 2.7% of GDP for 2019 and a gradual reduction to 1.0% of GDP by 2021. Turning to public debt ratios, gross debt increased to 25.7% of GDP in 2018 (from 24.9% of GDP in 2017), while net debt reached 11.4% of GDP (from 9.5%). Gross Debt ratio comply with Peru’s fiscal rule, which dictates that the gross public debt to GDP cannot exceed 30%. 
** Full story here.

Week ahead: On Friday, the statistics institute (INEI) will announce February’s CPI, which we forecast at 0.24% mom, which would lead the annual headline inflation to 2.12% yoy in February (practically unchanged from January).

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